US equity indexes demonstrated a mixed performance this week, as concerns regarding the fiscally expansionary policies of presidential election candidates emerged. These policies are expected to compel the Federal Reserve to maintain higher interest rates for an extended period, and this situation appears to outweigh the positive impact from quarterly earnings reports.
The Dow Jones Industrial Average concluded the week at 42,114.40, a decline from 43,275.91 recorded the previous week. Meanwhile, the S&P 500 closed at 5,808.12, down from 5,864.67 a week earlier. In contrast, the Nasdaq Composite observed a marginal increase, finishing at 18,518.61, compared to the previous week’s close of 18,489.55.
Significantly, the Nasdaq achieved a new record, spurred by Tesla's ($TSLA) admirable quarterly results and heightened anticipation surrounding upcoming earnings from major tech firms such as Apple ($AAPL), Microsoft ($MSFT), Alphabet ($GOOGL), Amazon.com ($AMZN), and Meta Platforms ($META) scheduled for next week. In the bond market, the two-year Treasury yield escalated to 4.11% late Friday, a rise from 3.6% when the Fed opted for rate cuts in September, emphasizing its focus on the labor market rather than inflation.
The 10-year yield experienced a considerable increase to 4.24%, up from 3.69%, as bond vigilantes reacted to the policy proposals from both the Democratic and Republican parties. Oxford Economics offered insights into the current economic landscape, suggesting that ongoing softening in the labor market indicates that monetary policy is restrictive at the current levels, which range between 4.75% to 5%.
They warned that a complete Republican victory in the upcoming US elections could lead to heightened inflationary pressures, which would delay rate cuts rather than produce a halt. Furthermore, gold is experiencing robust performance, trading at $2,755.21 an ounce, reflecting a 27% increase year-to-date. The FedWatch Tool reveals that the probability of the target rate settling within the 4% to 4.25% range by March stands at 44%, making it the highest likelihood among all potential rates.
By July, market analysts predict that the highest probability will favor rates between 3.5% to 3.75%. Oxford Economics noted that the market has significantly dialed down expectations for rate cuts, with only five cuts projected from the SOFR pricing and almost no cuts anticipated beyond July 2025. Additionally, the US Dollar index was recorded at 104.30, trading near its peak since early August.
This favorable performance is primarily supported by expectations of fewer rate cuts and increasing speculation regarding the potential return of Donald Trump as president, according to insights from D.A. Davidson..